Mother Nature will be strong force in cotton market

• Cotton prices seem to have some solid support at around 70 cents to 80 cents a pound, but could go higher, say analysts.
• The market still has to determine how much cotton gets planted in the United States and the world.
• China continues to hold a large reserve of cotton, and could hold onto it for a while.

Over the next few months, December 2013 cotton futures could trade in a price range between 70 cents and $1.05, according to cotton analysts speaking at the Ag Market Network’s April conference call.

The range will likely narrow as uncertainties in the market are resolved, including nailing down planted acreage and production in the world and the United States and pinning down export potential.

Analysts are unsure how higher cotton prices, weather and bearish corn price forecasts will affect U.S. cotton acres by the time spring planting is over, but most agree that what U.S. growers intend to plant in cotton this year has likely risen some.

U.S. cotton acreage and production, “is not going to get resolved until the August and September snapshots by USDA,” said Texas A&M Extension economist John Robinson, who sees a trading range for December futures between 70 cents and 90 cents. “Uncertainty by itself will keep futures in the upper end of the trading range, between 80 cents and 90 cents. When that production uncertainty is resolved, prices could slip back into the lower end of that range, between 70 cents and 80 cents.”

O.A. Cleveland, professor emeritus at Mississippi State University, said China’s recent announcement that it would continue its policy to offer domestic producers $1.49 a pound “was met with considerable disappointment in the Chinese cotton community. That seems very high to us, but they were expecting a higher support price because of the high costs of production there. What the Chinese did was increase the support price for grains and food crops at the expense of cotton.”

Based on this, Cleveland says China’s cotton acreage could decline from previous expectations. Cleveland also pointed to USDA’s recent 1.5 million bale increase in Chinese imports as a sign that they’ve “put a padlock on the warehouse,” in terms of releasing its reserve supply.

Not active in export market

“Plus they’ve never been particularly active in the export market anyway,” Cleveland said. “I think the market has been telling us that for some time. I don’t consider the market to be at an artificial level. I do understand the concern about China possibly changing its mind (deciding to liquidate its reserve), but it makes no economic sense for China to change their minds. We’re dealing with a new ballgame there.”

Kelli Merritt, a cotton producer, broker and merchant from Lamesa, Texas, says the cotton market has settled down somewhat, “and that’s a good thing. Two years ago as the U.S. crop began to get really short, there was this panic buying. This year, there has been a real resolve and acceptance across-the-board.”

Like Cleveland, Merritt believes China’s plan is to hold onto its reserve for the time being. “When they were disappointed in the $1.49 price, that tells you that they have to keep that price up. As long as China keeps their price up, and they’re not dumping their reserves, prices are going to stay good for us, and there’s going to be interest in our cotton from the Chinese. So every time they get more quota released, they’re going to use it, and they’re going to buy U.S. cotton.”

Texas A&M Extension professor emeritus Carl Anderson believes there is still a lot of risk in the market. “We’re getting comfortable where we are between 85 cents and 90 cents, but there are only a couple of million bales difference between foreign production and consumption. That’s a sensitive area for our exports.”

Anderson says producers could try to put a floor under the market, or a floor and ceiling, using options. “Farmers can use options in a way that won’t cost a lot, and they can have some sort of insurance,” Anderson said.

Anderson sees a price range of between 80 cents and 92 cents for December 2013, “with the risk of prices going to as low as 70 cents being a real possibility.”

“I see the market a whole lot stronger than 70 cents,” said O.A. Cleveland. “The lowest I can see the market going is 78 cents to 79 cents. I personally think the floor for December at 82 cents. I’m looking at a top in the market of $1.05. But where we’re really going is where Mother Nature takes us.”

Merritt sees a range between 83 cents and the upper 90s. “I wouldn’t want to go much higher than that.”

Robinson says another downside risk “is that there is a big hedge fund in a net long position that’s underlying a big chunk of this rally. It they downshift out of that position, it could put us back in the lower half of the range.” Robinson’s forecast range is 70 cents to 90 cents.